That was one of the questions being asked in the recent digital session hosted by Axora. A panel of experts discussed how oil majors are facing a new trilemma: the Covid-19 pandemic, a significant drop in oil price and demand, and the green energy transition.
Clara Altobell of Serica Energy, Iain Pitt, founder of the Energy Council, and Chris Ayres from OPEX Group examined the struggles facing the industry and some of the issues causing a massive strategic rethink.
As renewables become cheaper and we witness the demise of hydrocarbons, will the oil and gas sector cope with the ever-increasing pressure to reach net zero?
Is the sector ready to embrace change?
Throughout the discussion, the panel stated the sector is ready to embrace change, no matter the challenges that might bring. Some are predicting that in mid-2021, once vaccinations are commonplace and the world gets back to some form of normal, the oil price might improve, causing a supply crunch.
When asked if the sector will return to business as usual, Altobel said: “If the price increases and there is a squeeze in supply, it means that the energy transition hasn’t progressed enough.”
Panelists agreed that the sector will not return to ‘business as usual’, but rather suggested that more will continually be done to drive the energy transition forward. As governments commit and adhere to the Paris Agreement, so more pressure is applied to the sector to comply.
As counter-intuitive as it sounds, the panel stated that higher oil prices mean that companies must do more to develop stranded assets and move towards net zero. A higher oil price ultimately means more can be invested in the digitalisation and the infrastructure needed to reduce emissions.
Altobell warned however, that all assets can’t be retired simultaneously, as that would lead to a shortage in supply and fuel imports, possibly from countries not aligned to the Paris Agreement.
Iain Pitt raised the important difference in Africa, where the sector is, in fact, looking to return to normal, conflicting with other regions around the world. “Some explorers just want to get back to what they’ve been doing over the past 30 or 40 years”.
Pitt highlighted that there is a lot to be considered in these regions in terms of employment, education and the development of these economies, although he stated there are companies operating in Africa wanting to operate with lower hydrocarbons.
The panel stated that the sector needs to create a level playing field across the world ensuring an equal transition, no matter the region.
Technology will help to level that playing field. According to Ayres of OPEX Group: “A little bit of continuous pressure helps to change people’s perspectives and behaviours and that cultural shift has started in the oil and gas industry, but we are going to need to keep working at it.
He added: “Technology plays an important role and ranges from big net zero tech like offshore wind and hydrogen through to digital technologies that help to deliver tangible benefits immediately.”
According to Ayres, technology such as blockchain can map the environmental impact of producing and importing dirtier hydrocarbons and ultimately help to solve some of the challenges facing the sector today.
Barriers to change
A significant barrier to change is the lack of clear legislation. Altobell explained that in the past, carbon capture and storage (CCS) pilot projects managed to get quite far, however the government ended up pulling the funding.
“There is now a push in the UK to create industrial clusters, however, you need CCS and hydrogen. Currently, there is insufficient funding,” she explained, adding that investors are nervous and unsure as to which projects will take off and government support is clearly lagging.
Altobell believes government leadership is vital to lead the transition, due to the fact that multiple industries need to change simultaneously, at a huge cost. A clear economic business model is needed.
Further to the government’s role in supporting the transition, Pitt, suggested that in this case, the private sector has significant sway and even though government induces, the private sector will lead the change.
Pitt explained that even though it’s different across the world, more banks are abandoning coal finance and emphasised that funding will come from private sector investors, indicating government has less push than other factors.
Chris Ayres, sees there are pockets of agility within the sector however, the slow change of mindsets is causing delayed change. Said Ayres: “The mindset shift is happening, but slowly. They need to bring in new young engineers who can operate in a digital context… The minds will shift as the benefits [of digitalisation and innovation] become more tangible”.
Altobell added that overcoming the disruption of rapid digitalisation is a challenge. She highlighted that in this well-established industry, legacy cultures persist, making it difficult to adapt to the ‘fail fast’ approach required by the world today.
Fail fast, learn fast, make changes, repeat. There is a lot of innovation available to assist however, understanding what will work best and implementing it in the most effective way can be a challenge.
The truth is that the oil and gas sector is facing significant challenges and a need to change rapidly. However, is it really as simple as oil and gas battling it out against renewables?
Says Pitt: “The debate is not oil and gas versus renewables but rather oil and gas and renewables versus coal. Society has a high tolerance for gas, less so for coal”.
It will therefore be interesting to see how dirty fuels are phased out and at what pace, influenced by the various push and pull factors, such as legislation, digitalisation and pressure from an decreasingly tolerant society.
The full discussion is available online.